Funding Circle is onto a winning strategy

Although marketplace lenders in the UK haven't faced as many struggles as their US counterparts recently, the industry nevertheless has grown more competitive and is beginning to threaten smaller lenders with consolidation. Funding Circle, however, has remained a firm market leader, and its annual results for 2016 show it continues to do well.

Its losses narrowed 3% from £37 million ($50 million) in 2015 to £36 million ($48 million) in 2016, as revenue grew 59% year-over-year (YoY) from £32 million ($43 million) to £51 million ($68 million), and originations saw a 61% boost from £846 million ($1.1 billion) to £1.4 billion ($1.9 billion).

Several elements in Funding Circle's business strategy seem to be behind its ongoing strength:

Its capital diversification efforts. Throughout 2016, Funding Circle remained dedicated to diversifying the funding sources for its small- and medium-sized business (SMB) loans. It securitized loans for the first time in April, significantly expanded its publicly listed SMB fund, grew its number of retail investors by 15,000 to around 70,000, and signed a deal in June under which the European Investment Bank (EIB) agreed to lend £100 million ($134 million) to UK SMBs through its platform. Funding Circle seems to be continuing on this track in 2017, signing a deal similar to the one with the EIB with Dutch insurer Aegon in August for £160 million ($206 million).

Its measured expansion. Funding Circle has pursued geographical expansion, but it hasn't tried to stretch beyond its capacity. The company drastically adjusted its US business model in September 2016 to remain competitive, and increased focus on its well-performing German arm to capitalize on its strengths. It's also stuck with this strategy in 2017 — in January, it withdrew from a flagging Spanish venture. This suggests the company isn't pursuing growth for its own sake, and is willing to prune and make U-turns where necessary.

Its focus on SMBs. Consumer alt lenders in the UK are facing a tougher time as the economy contracts, leaving people unable to repay their existing loans. At the same time, incumbent banks are less willing to lend to businesses in the wake of the Brexit vote, which Funding Circle says opened up a niche for alt lenders that the company is now capitalizing on.

Funding Circle seems primed for continued success, but it may still be tripped up by external factors. The company's apparently well-planned business model and continual adaptations suggest it will find it easy to retain its market share even as more big banks launch SMB offerings. However, despite affording Funding Circle a valuable target market, Brexit is still a risk, and it remains to be seen how well the company will hold up as negotiations continue to negatively impact the economy. As such, Funding Circle's continued welfare depends on how well SMBs weather the increasingly likely economic downturn.

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